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Statement of Cash Flow
The statement of cash flows and projected one is a great tool for managers to decide how a company is doing. This financial statement will tell how much cash will be on hand for operation, as well as any projected upgrades. A company needs to know how much cash is on hand to make sure they can pay their debt on time, pay scheduled dividends to their stock holders to keep them happy, as well as if there are short falls, how much will need to be procured from some type of loan.
According to GAAP accounting principles, the statement of cash flows should be organized into three parts; Operating activities, Investing activities and Financing activities. Cash inflow and outflow from operating activities will include revenue and expense that effects the company’s net income. Investing activities will cover cash flows from selling and acquiring long term and short term investments as well as extension of loans to others. Financing Activities cash flow is generated from buying stocks back, as well as paying dividends to share holders. Borrowing money from the bank and repaying it is also included on this section of the statement.
The income statement can be calculated using the direct and indirect method. With the direct method, the income statement is reconstructed using cash receipts and cash disbursements (Brewer, Garrison and Noreen, 2011). Indirect methods derive amounts from removing any items that don’t affect cash flow. This method is actually is preferred because it will show the company any discrepancies between net income and net cash provided by operating activities.